Forrester Research, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Amounts are in millions of dollars except per-share data. The filing describes Forrester’s research subscriptions and data products, advisory services, consulting projects, and events.
Financial performance and condition
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $82.9 | $79.0 | $156.0 | $150.3 |
| Operating income | $7.1 | $9.8 | $7.1 | $13.1 |
| Operating margin | 8.5% | 12.4% | 4.6% | 8.7% |
| Net income | $4.3 | $6.2 | $4.2 | $8.4 |
| Diluted EPS | $0.23 | $0.28 | $0.22 | $0.38 |
| Operating cash flow | Not presented quarterly | $35.3 | $37.2 |
- Revenue mix and growth: Q2 research services revenue rose 2% to $52.3; advisory services and events increased 11% to $30.6. For the first half, research revenue grew 2% to $103.1 and advisory/events grew 9% to $52.9. Management attributed overall growth primarily to advisory and consulting demand, with foreign exchange adding about 1 percentage point to reported revenue growth.
- Margins and costs: Operating expenses rose faster than revenue, reducing Q2 operating margin to 8.5% from 12.4%; first-half margin was 4.6% versus 8.7%. Cost of services, selling and marketing, and general and administrative expenses increased, largely reflecting compensation, hiring, consulting build-out, and event costs. Net margin was 5.2% in Q2 versus 7.8%, and 2.7% for the first half versus 5.6%.
- Balance sheet and liquidity: At June 30, cash and equivalents were $52.6 and marketable investments were $81.0, totaling $133.7. Current assets were $208.6 and current liabilities $175.5; deferred revenue was $143.9. Total liabilities were $185.0. The filing reports no line of credit and does not identify material interest-bearing debt. Management said available cash, investments, and operating cash flows should meet requirements for at least two years.
- Cash uses and capital returns: First-half operating cash flow was $35.3. Investing activities used $0.1; financing activities used $56.8, primarily reflecting $54.9 of share repurchases and $6.1 of dividends, partly offset by $4.2 of employee equity-plan proceeds. The company repurchased approximately 1.5 million shares in the first half. Remaining repurchase authorization was about $26.0 at June 30.
- Other balance-sheet changes: Total assets declined to $338.9 from $402.2 at year-end 2013, and stockholders’ equity fell to $153.9 from $204.7, with substantial repurchases a key capital-allocation item. Deferred revenue was down from $152.9 at year-end, but up 6% year over year.
Material changes and management commentary
- Revenue increased 5% in Q2 and 4% in the first half, while operating income and net income declined materially year over year. Management cited higher staffing and operating costs, including investments in sales, product specialists, and a dedicated consulting organization.
- Agreement value increased 7% year over year to $225.5 and deferred revenue increased 6% to $143.9, which management attributed primarily to increased contract bookings. Client retention was 75% versus 76%; dollar retention was 87% versus 89%; enrichment improved to 97% from 95%. Client count was 2,439 versus 2,451.
- Consulting revenue grew substantially as delivery shifted from research personnel to the Project Consulting segment. Management expected the transition to be complete by the end of 2014, with essentially all project consulting delivered by that segment in 2015. The shift affects segment comparisons.
- Management planned to expand the quota-carrying sales force by approximately 5%–7% in 2014, subject to the business environment, and expected to continue share repurchases as market conditions warranted. A $0.16 per-share dividend was declared in July, payable in September. No specific full-year revenue or earnings guidance is stated in the filing.
Risks, contingencies, and unusual items
- In Q1 2014, the company recorded $0.5 of out-of-period corrections, including $0.4 of depreciation and $0.1 of other items; management concluded the errors were immaterial to prior-period financial statements.
- The 2013 comparative results were revised for immaterial prior-period errors. The Q2 2013 revision increased revenue by $0.8 and net income by $0.6; first-half 2013 revenue increased by $0.7 and net income by $0.4. The filing states the cash-flow effect was offsetting and did not change operating cash flow.
- Forrester recorded $1.9 of 2014 first-half reorganization costs after terminating approximately 1% of employees to realign resources; the $1.1 accrual at June 30 was expected to be paid by year-end.
- The six-month effective tax rate rose to 41.3% from 38.6%, primarily due to $0.2 of potential additional tax expense related to an ongoing U.S. state audit.
- Management cited risks including membership retention and enrichment, technology spending, international operations and foreign exchange, ability to develop new products, hiring and retention of key staff, economic and market conditions, network disruptions and security breaches, competition, and quarterly variability. It reported disclosure controls were effective and no material change in internal control during the quarter.
Investor facts to verify
- Whether the growth in agreement value and deferred revenue translates into sustained recognized revenue, given weaker client and dollar retention than a year earlier.
- Whether operating margins recover as sales-force hiring and consulting investment continue, and how much of consulting growth reflects organizational transfer versus underlying demand.
- Cash and investment balances, overseas funds of $35.2, repurchase pace and remaining authorization, and the sustainability of dividends alongside buybacks.
- Progress and outcome of the state tax audit, and payment timing for reorganization costs.
- The effect of the disclosed 2013 comparative revisions and Q1 2014 out-of-period corrections when assessing reported trends.